Should I pay off my housing loan? or invest the money?
I have handled this question many times, and have come out with similar answers. However here are some questions which are IRRELEVANT ….
1. How much has the house appreciated by: Many people write in to say ‘I paid Rs. 20L now it is worth Rs. 37 lakhs’…This is completely immaterial. Your house appreciating has NOTHING to do with how it was funded. Whether you paid money and bought it, it was gifted by your father (or her father!), or you got it as a bribe for a terrorist activity – THE MARKET DOES NOT KNOW, nor is it bothered!
2. What is your tax slab: Imagine telling a businessman ‘please incur this expense because this is tax deductible’ yuck it makes NO SENSE at all.
http://www.subramoney.com/2008/01/real-estate-to-create-wealth/
3. How long are you going to live in that house: makes no sense UNLESS you think that the new buyer will NEED that loan. However, however, however, whether that person will get the loan depends on whether his FORM 16 is strong enough to support that loan, NOT WHETHER you have the loan or not.
4. Are you planning to buy a new house SOON? If you have any plans of buying a new house. Let us say you have about Rs. 18 lakhs of loan to be repaid, and you are planning to buy a new house for Rs. 100 lakhs – and for this you need a 55 lakh rupee loan, it may make some sense to keep this loan and take a fresh loan for the difference amount. Sometimes EVEN this may not be correct especially if you can get a nice clean big deal from a new lender (normally that is what happens)….
What is relevant to ask?
1. Do you have a car loan, personal loan, etc? – then please repay those loans. They are far more expensive than a home loan.
2. Can you get a better return on your own? Let us say your loan is Rs. 18L and you are paying 10.8% p.a. as interest, then it makes NO SENSE to put Rs. 4L in PPF and earn 8.3% p.a. Minimising the cash outflow makes sense.
3. How much is your emergency cash situation, JOB situation, and immediate money requirement for kids education, medical expenses, marriage of children,…..etc…
read on…http://www.subramoney.com/2012/03/what-to-do-with-a-windfall/
having said that the following article could also be useful
http://www.subramoney.com/2013/01/pay-off-mortgage-or-invest/
PrAvEen
Long back I made some comments in your post at point 2. Invite your comments on it.
subra
instead of that deduction if you take a cut in your salary, the effect will be the same, right? A deduction is interesting ONLY if it is a capital payment, NOT if it is an expense payment. So 80C is good, sec 24 is an incentive for Hdfc 🙁 so enjoy yourself…
SJ
If you have Rs 15 lakhs loan at approx 10% pa, and are in the 30% bracket and can avail the housing loan deduction of 50k on the Rs 1.5 lakh interest then the effective cost of loan is less than 7% and then it makes sense to continue even if you put it in PPF at 8.3%
abhay
When it comes to investing we say that inflation errodes the capital but when it comes to loan, inflation is generally not considered.
If interest rate on loan = inflation rate , does that mean we get to use that money for free? Please let us know your thoughts?
PrAvEen
Subra sir, after getting 3% of interest back as deduction & 3% as rental, so effective interest rate I pay homeloan will be 4.5% (10.5% – 3% – 3%). So if I am in situation to pay monthly EMI’s & on a at a interest of 4.5% is not our house/apt will easily appreciate (@4.5%) even in worst case scenario.
I am very weak in interest rate calculation., so plz pardon me for any dumb calculations
Dr Saneej Kanhirat
pre payment of personal loan attracts fine.
so I’m paying my housing loan whenever I gets money.
Now after reading your blog, I think I can pay the car loan first.
As I’m getting tax benefits for my home loan.